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New Complex Production Deduction


Wednesday, March 1, 2006
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If you’re a small business owner here’s one more reason to have a professional handle your business return.

 

 

The American Jobs Creation Act of 2004 added the domestic production activities deduction, a tax benefit for certain domestic production activities. This deduction provides a tax savings against income attributable to domestic production activities.

 

 

The Act created new Internal Revenue Code section 199 and is available to corporations, individuals, and pass-thru entities such as S Corporations, partnerships, estates and trusts.

 

 

The draft version of the applicable form has only 19 lines, and looks deceptively easy.

 

 

It’s not.

 

 

It’s going to make tax preparers lose sleep and confuse business owners all over the .

 

 

Let’s take a look at how this deduction works.

 

 

For 2005 and 2006, the deduction equals 3% of the lesser of: (a) qualified production activities income; or (b) taxable income for the taxable year. However, the deduction for a taxable year is limited to 50 percent of the W-2 wages paid by the taxpayer during the calendar year that ends in such taxable year. Thus, self-employed manufacturers do not get this deduction.

 

 

The deduction is phased-in; for 2007 through 2009 the percentage increases to 6% and for 2010 and after the percentage will be 9%.

 

 

Qualified production income must have occurred in whole or in significant part within the . For foreign production income to qualify direct labor and related factory burden must be at least 20% of the total cost of goods sold.

 

 

An allocation must then be made between the manufacturing and service aspects of your business. And then an allocation must be made between the products manufactured domestically and those manufactured internationally. Finally, an allocation must be made between the domestic salaries by services and manufacturing.

 

 

Now, to make this more confusing special rules apply to certain industries, such as architectural and engineering services. Newspaper production is a qualifying service. Software development qualifies but software support doesn’t. Restaurants don’t qualify but food preparation done for wholesale does qualify. The production of certain films and sound recordings are also qualifying activities.

 

 

Doesn’t that sound easy? Not even the most seasoned tax professional can do this quickly. It takes a considerable amount of time to master and it can often be frustrating. But an extra 3% deduction can be a significant deduction and should not be missed. So please give us a call and we’ll help you take advantage of this valuable deduction.

 

 

Chuck Chuckuemeka is partner at Chuckuemeka & Associates in Bloomington,

Minnesota . He can be reached at 952-814-9292.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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About Chuck Chuckuemeka

Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.

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